Gold Extends Gains Above $1,800 Ahead of Pivotal U.S. Inflation Data

By Barani Krishnan

AiVIF.com -- Is the inflation-play back in gold?

It seems so, although bullion aficionados will argue that hedging against inflation is an inherent part of gold’s daily flows and that the yellow metal never really diverged from that relationship; only those who don’t understand gold will utter the contrary, is their logic.

Gold prices ran above the key $1,800 level for a second day in a row on Tuesday as market participants bet that the market’s safe-haven proposition will shine in the face of Wednesday’s all-important Consumer Price Index data.

Economists tracked by AiVIF.com are projecting a growth of 8.7% in the CPI for the year to July, versus the rise of 9.1% during the 12 months to June. If true, it will be a sign that the Federal Reserve’s efforts in fighting inflation are starting to work.

Yet, a reduction of less than half a percent in year-on-year inflation barely makes a difference to what the Fed is fighting for. The central bank, as everyone who trades gold knows, wants to bring inflation back to its long-cherished target of 2% a year; or 4.5 times less than what the CPI was for June.

While the Fed would be inclined to keep raising rates until it gets to that inflation target, longs in gold are also betting on more safe-haven flows concurrently into the yellow metal for those wanting to hedge against economic uncertainties.

“Gold prices are firming up ahead of a pivotal inflation report that could tilt the Fed rate hike expectations scales,” said Ed Moya, analyst at online trading platform OANDA.

“Gold is getting a boost today from both safe-haven flows as stocks weaken and as the dollar softens. If inflation eases a little more than expected, gold could make a run towards the $1850 region. Geopolitical risks remain elevated and that could keep gold supported above $1800 going into year end.”

The benchmark gold futures contract on New York’s Comex, December, settled at $1,812.30, up $7.10, or 0.4%. It rose $14, or 0.8%, in the previous session.

The spot price of bullion, more closely followed than futures by some traders, was at $1,794.89 by 3:50 PM ET (19:50 GMT), up $5.76, or 0.3%.

While the mere threat of rate hikes once sent gold bulls scurrying for cover, recent weeks have shown the yellow metal holding its own against such worries, even after last week’s epic U.S. non-farm payrolls for July that showed a job creation more than twice the level forecast by economists. Such a blockbuster jobs report would typically embolden the Fed to be more aggressive with rate hikes.

Notwithstanding the ingredients in place for a more hawkish Fed, AiVIF.com’s Rate Monitor Tool on Tuesday afternoon showed a reduced 46% chance of the central bank implementing a 75 basis point rate hike for July, versus Monday’s bet for 67%.

Aside from the CPI, the producer price index figures for July will be released on Thursday, along with the weekly report on initial jobless claims, while the University of Michigan consumer sentiment index will be published on Friday.